Client Service May 5, 2016

Helping 403(b) Clients with Best Practices

Advisers can help 403(b) retirement plan sponsors with plan design and fiduciary best practices, according to Brad Holterhaus with Principal.
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The Plan Sponsor Council of America’s (PSCA’s) last 403(b) Survey found 403(b) plans were still catching up with retirement plan best practices, Brad Holterhaus, director of Tax-Exempt Markets at Principal, told a group of attendees of the PSCA’s 69th Annual Conference.

Overall, Principal suggests plan design best practices:

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  • Automatically enroll participants at a deferral of 6% of salary (While more than half of 401(k) plans auto enroll participants, only 16% of 403(b)s do, the PSCA survey found);
  • Automatically escalate deferrals each year up to 10% of salary;
  • Do a re-enrollment to sweep in all employees not participating or not participating at a 6% deferral rate;
  • Choose an appropriate qualified default investment alternative (QDIA) for the plan; and
  • Stretch the match to get employees to save more.

Holterhaus clarified that his discussion was about Employee Retirement Income Security Act (ERISA)-governed 403(b) plans.

Other plan design best practices include streamlining the plan’s investment lineup. Holterhaus noted that the average number of options in 401(k) plans is 19, while the average in 403(b) plans is 29—and the average is 43 for plans in the 1,000 or more participants range.

Using a single recordkeeper can also help streamline the plan and its administration. “About 83% of 403(b)s have moved to a single provider, and we expect that trend to continue,” Holterhaus said.

He suggested a retirement plan adviser can help 403(b)s with plan design and recordkeeper selection, and he shared a case study providing an example about how advisers can help. Holterhaus said one plan sponsor didn’t like its current recordkeeper, but it didn’t know what to do about it. The plan’s payroll provider suggested the plan sponsor freeze the 403(b) and adopt a 401(k) plan instead. Now the plan sponsor has two plans to administer and for which it has to file a Form 5500. Holterhaus told conference attendees an adviser would have led them differently by doing a request for proposals (RFP). He also suggested that best practice is to do an RFP to at least benchmark providers every three to five years.

He noted there are fewer providers in the 403(b) space than in the 401(k) space. Plan sponsors should make sure the provider knows the tax-exempt market, has the technology and investment options needed for plan administration and design, provides participant education, and can administer other plan types such as defined benefit plans and non-qualified plans.

NEXT: Fiduciary best practices

Since passage of 403(b) regulations in 2007, 403(b) plan sponsors have been getting a grip on their fiduciary responsibilities, but many are still falling behind. Of non-profit organizations that sponsor 403(b) retirement plans, 60% are reviewing and evaluating the investment options in their plans themselves, according to the latest 403(b) Snapshot Survey from the PSCA and sponsored by the Principal Financial Group.

Holterhaus said the best practice is to have an investment expert review and monitor investments. He also suggested that having an investment policy statement (IPS) in place and following it is a best practice. He noted that half of 403(b) plan sponsors surveyed indicated either they do not have an IPS or they are unsure if they do.

The good news is more 403(b) plans are doing quarterly and semi-annual investment monitoring rather than annual or less frequent.

Holterhaus said the number of 403(b) plans being audited is up about 8% to 10%. He suggested plan advisers can help plan sponsors with compliance and fiduciary responsibility, providing another case study. A 403(b) plan sponsors filed a Form 990, required by non-profits, which indicated it provided an employer match to employees in its 403(b) plan. However, the plan had not filed a Form 5500, so that sent up a red flag to the Internal Revenue Service (IRS). The plan also had no plan document, something required of 403(b)s since 2009. The plan sponsor hired an adviser who helped it get a plan document in place and correct compliance errors with the IRS. Holterhaus said, with the adviser’s help, the plan sponsor paid no fines or penalties and it didn’t have to go back and correct for prior years.

Providers can also help 403(b) plan sponsors with fiduciary responsibilities, Holterhaus noted. For example, Principal offers a fiduciary document catalog and a fiduciary activity log report.

Holterhaus concluded by telling conference attendees they should be measuring plan success by the retirement readiness of participants. He noted that many retirees who work later say they do so to keep employer-sponsored health care. Older employees are more expensive to employers. While it is still good to measure plan participation and participants’ savings rates, the true measure of success is how many participants are on track to replace a certain percent—70% to 80%—of income in retirement.
Client Service May 5, 2016

Being a Millennial Financial Adviser

If a client at age 65 is hesitant to work with an adviser who is much younger than they are, what’s going to happen in 10 years? Or 20 years?
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PLANADVISER and Hartford Funds sat down to discuss some upcoming “roundtable research” the investment services firm is putting together, looking specifically at the experiences and expectations of Millennials working in the financial advisory field.

Hartford Funds plans to publish a white paper on the topic soon, but in the meantime, the firm’s director of strategic markets, Bill McManus, highlighted some of the preliminary findings.  

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“Our interest in this topic really goes back to our relationship with the MIT Age Lab,” McManus tells PLANADVISER. “We have noticed they have focused in some important ways on the Baby Boomer demographic, yet what we’re finding is that a lot of their research really ends up touching directly on Millennials, and the other generations as well. The generations all influence one another, particularly when we think about the upcoming transfer of wealth from Boomers to Millennials.”

Against this backdrop there is a slowly growing cohort of Millennials who are themselves stepping into the advisory industry—particularly among the older slices of the generation, roughly ages 25 to 35. McManus explains that Hartford Funds recently brought together a group of stand-out young advisers, asking them a wide variety of questions about how they got into the industry and what their aspirations are.

“One message we heard loud and clear: The barriers to entry have shifted and in many cases have gotten more difficult, so it’s not exactly an easy business to get into at the beginning,” McManus says. “Those who are working in the industry are concentrated in firms that recognize that they need to add younger talent and are putting in good processes to make that happen.”

Not a big surprise, Hartford Funds found Millennials feel one of the most important ways firms can ensure recruiting success among this age cohort is to adopt a team approach, at least at the beginning.

“Millennial advisers told us they see a lot of benefits from mentoring and working alongside an experienced adviser as they start to build their own book of business. It benefits both older and younger advisers, we believe,” McManus adds. “Older clients wouldn’t necessarily want to work with someone in their 20s and 30s, but with the team approach it works better and really makes that transition easier.”

NEXT: Winning clients and building business as a Millennial adviser 

Also not a big surprise, Millennial advisers cited the preconceptions of older advisory clients as one of their top hurdles to building sustainable and successful books of business. Many of the older Americans who have substantial personal assets simply do not want to work with an adviser who may be multiple decades younger than they are.

“This is a very commonly cited hurdle to successfully growing business,” McManus explains, “but while it is common it’s not necessarily the rule. Many older Americans are also perfectly willing to do this, especially when it starts with a team approach where an older, trusted adviser is involved in a transition period. Millennials can benefit from the backing of a trusted mentor, and from the halo benefits of a advisory firm brand.”  

One of the most effective arguments is also the most logical, Millennial advisers say. If a client at age 65 is hesitant to work with an adviser who is much younger than they are, what’s going to happen to that client in 10 years? Or 20 years? What if the individual lives to be 90? Will they demand an 85-year old adviser?

“And if you think about the reverse argument, it makes a whole lot of sense,” McManus adds. “If a 65-year-old takes on an adviser who is in their 30s, say, that will leave decades of time for the relationship to grow and develop. I can tell you from sitting down with our roundtable of advisers that these Millennial advisers already have what it takes to drive great retirement outcomes. They also have a lot of empathy and personal experience with their own parents and grandparents they can rely on when building out these relationships. Personal stories go a long way.”

Of course, Millennials advisers also have turned their attention to prospecting and securing clients their own age, both for the wealth they have now and the wealth they will earn and inherit in the future.

“This effort relies a lot on robo-advice technology for efficiency and scalability, Millennial advisers tell us,” McManus concludes. “But what is perhaps most interesting is that, even among the youngest generation of advisers working right now, the importance of personal relationships was constantly cited. Millennial advisers expect this to remain a relationship-driven industry, even as technology plays a bigger role as well.”  

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